This will reduce risks for banks and enhance lending, says head of banks federation.

Jojo Puthuparampil is a business news writer for Inc. Arabia.

The UAE government should offer guarantees on loans to small and medium-sized enterprises (SMEs) to reduce the risk for banks, according to as senior banker.

In order to encourage lenders to work with SMEs, the government should offer loan guarantees of up to 90%, Abdulaziz Al Ghurair, CEO of Mashreq Bank and chairman of the UAE Banks Federation, told Zawya.

“The banks get the guarantee from the government guaranteeing the startup…a 90%-85% guarantee. The banks take a risk of 10%-15%. That way I will be more encouraged to lend and I am secure if I lose this loan. I will lose only10%-15%, but the rest will be supported by the government,” he said on the sidelines of a seminar organized by the Emirati Entrepreneurs Association.

Al Ghurair said there is no need to impose legislation to mandate banks to lend to SMEs. There should be an understanding and shared responsibility instead of legislation.

Al Ghurair said that legislation alone was not the answer.

“The UAE never worked like this. We have more or less a free market, allowing everybody to explore the best way for lending,” he said.

Last month, The Central Bank of the United Arab Emirates (CBUAE) has issued draft rules aimed at getting banks to lend more to small and medium-sized enterprises (SMEs).

The move follows reports that some lenders cut their exposure to such companies or raised charges. Some banks have had to make huge provisions in the past 18 months against bad debt, much of it relating to SMEs, which account for around 60% UAE’s gross domestic product.

In order to protect themselves against further defaults, some banks raised lending fees to the sector or withdrew from lending to such companies altogether.

In a draft regulation circulated to banks recently via the UAE Banks Federation (UBF), the regulator said all banks should have a dedicated unit in place for SME lending, steered by anSME lending strategy and policy.

It said banks should have set targets and limits for SME lending and would be encouraged to support UAE national entrepreneurs. Banks would have to provide an explanation to the central bank in cases where lending toSMEs falls below their target.

Under the proposed rules, banks should not impose ‘unreasonable collateral requirements’ in return for lending. They should also provide borrowers with explanations in cases where they refuse to lend to the sector or withdraw credit.

A few months ago, a report by the Central Bank of the UAE said UAE banks have become less willing to lend to businesses and individuals.

The ongoing tightening of credit conditions for business loans suggested the reduced willingness to extend business loans among financial institutions, reflecting a reversion of conditions towards a slow path consistent with other indicators of economic activity, the bank said.

At the same time, borrowers, especially owners of small businesses and expats, have become less keen to tap debt at a time when uncertainty about the future growth of the economy intensify.